a.1. IHOP Corp (9-30-2002): Reacquired franchise and equipment held for sale is separated into two parts: current asset and long-term receivables (SEC Government, 2002, Item 1). The company estimates the useful life of the assets, and records the amortization of the asset. For instance, in the quarterly report ended September 2002, amortization on franchise operations is $1,647,000. In this case, the company treats its reacquired franchise rights as intangible assets that have limited lives. 2. Rewards Network Inc. (11-14-2002):

The company classifies franchise rights to goodwill. Because according to SFAS Nos. 141, which indicates that intangible assets not specifically identified and inseparable from the business as a whole (SFAS 141). Most of its business combination is reacquiring franchising rights. In 2002, the company decides that reacquired franchise rights can no long be separable from goodwill by the new standard. The rights are not amortized (SEC Government, 2002, para 7).

b. By asserting that the reacquired franchise asset has indefinite life, Krispy Kreme can expand its economic benefits. On its 2003 balance sheet, the company has reacquired franchise rights as asset that worth $48,502; and as the company continues to reacquire franchise rights, the worth of its asset boosts up to $174,537 the next year (Exhibit 1). In addition, because the rights have indefinite life, they do not have to be amortized. Net income becomes greater. One factor that suggests that Krispy Kreme's franchise rights have indefinite live is that these rights are "the excess of the net amount assigned to identifiable assets and liabilities recorded upon the acquisition of franchise markets" (Exhibit 3). The identifiable assets have already been amortized. Franchise rights are classified as some intangible assets that have not been identified, and there is no standard to how much is the amount to be amortized. The company then does not subject them to...

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...discuss the environment of Krispy Kreme and my analysis as to what led to the company’s position in 2004. Second, I will discuss the financial health and current condition based upon the historical income statements and balance sheets. Third, I will discuss the financial ratios in relation to the financial statements. Fourth, I will discuss if Krispy Kreme was financially healthy at the end of 2004. Fifth, I will discuss my assessment of Krispy Kreme’s health and why I think the stock price dropped by 80% between 2003 and 2004. Sixth, I will discuss why I think the market reacted so
negatively to the disclosures about adverse results and the revelations in the Wall Street Journal regarding the firm’s accounting methods for the franchise rights. Lastly, I will provide my recommendations for turning around Krispy Kreme Doughnuts’ business.
COMPANY POSITION
Krispy Kreme Doughnuts started small by selling directly to grocery stores. Their doughnuts became so popular they began selling directly to customers. They sold a delicious doughnut and a viewing experience. When Beatrice Foods bought the company, her business model did not succeed because it expanded the product line in the opposite direction of what consumers wanted and she inputted cheap ingredients into a popular recipe which sacrificed taste. When she sold the company to the group of franchisees, it pushed the company back into a...

...potential investors of Krispy Kreme Doughnuts Inc.
DATE: Tuesday, January 19 2010
SUBJECT: Krispy Kreme Doughnuts Inc. Analysis
1) Identification of issues:
* Is Krispy Kreme’s a healthy company?
* What had happened to the company?
* Why were so many investors fleeing the popular doughnut maker?
* Were the revelations about the company’s franchise accounting practices sufficient to drive that much value out of the stock?
* Were there deeper issues that deserved scrutiny?
2) Recommendations
3) Quantitative Analysis
As we begin to analyze Krispy Kreme Doughnuts from a quantitative perspective, we will address our first issue; Was the company healthy? When assessing liquidity and profitability ratio performance compared to their competition, KKD seems to be doing well. The company showed a current ratio of 3.25, as opposed to their industry average of 1.17 at END of FY2003. (See Appendix attached) They show a net profit margin of 8.58%, being above the average by 2.38%. Although these ratios may seem strong, we believe them to have been calculated based on inflated figures. When reviewing the Krispy Kreme Doughnut Company’s financial statements, we can see that the statements are overstated. Firstly, as the article in the Journal pointed out, interest paid by their franchise agreements was recorded as interest income, translating into pure profit rather than...

...KRISPY KREME DOUGHNUTS, INC.—2004 Cynthia Duff
Francis Marion University Ticker Symbol: KKD www.krispykreme.com
The neon sign "Hot Doughnuts Now," when illuminated, lures hungry customers into the local Krispy Kreme stores. The sign signals that Krispy Kreme's signature product, Hot Original Glazed doughnuts, are right now rolling under the glazing process and are ready to be devoured by anxiously waiting customers. There's nothing better than a hot, fresh, fluffy glazed doughnut that melts in your mouth to satisfy your sweet tooth.
Krispy Kreme Doughnuts went public on April 5, 2000, allowing its customers to have their doughnuts and eat them too. It opened a test doughnut-making store in a Wal-Mart Super center in October 2003.
HISTORY
Vernon Rudolph opened a doughnut company, Krispy Kreme, on July 13, 1937, in Winston-Salem, North Carolina. The company started out by selling doughnuts to local grocery stores. People walking in front of the bakery soon began stopping by to ask if they could purchase the doughnuts hot. Rudolph decided to cut a hole in the wall of the bakery so that his Hot Original Glazed doughnuts could be sold directly to the customer, marking the introduction of Krispy Kreme's retail service. During the 1950’s the doughnut-making process was mechanized with the new Krispy Kreme automat. doughnut cutter. Hand-cut doughnuts became a thing of the...

...﻿Krispy Kreme started as a single doughnut shop in 1937 when Vernon Rudolph acquired the special recipe from a French chef. Very quickly, the doughnuts rose in popularity and the number of shops expanded. By April 2000, after the IPO Krispy Kreme shares were selling for 62 times earnings. Krispy Kreme had a share price of $40.63, which gave the firm a market capitalization of about $500 million. Since the IPO the company had announced an aggressive growth strategy, in which they planned to increase the number of stores from 144 to 500 over five years and also grow internationally. In order to generate revenue, Krispy Kreme Doughnuts had four primary sources: On-premises sale (27%), Off-premises sales (40%), manufacturing and distribution (29%) and franchise royalties and fees (4%).
Krispy Kreme, once known as the “hottest brand in America,” had taken a turn for the worse when they announced adverse results in May 2004. This could have been potentially attributed to the recent low-carbohydrate diet trend in the U.S. Following this downturn, things got even worse for KKD when the Wall Street Journal published a story about the companies aggressive accounting strategies in regards to their franchise acquisitions. Krispy Kreme recorded the interest paid by the franchise as interest income, which was immediate profit. The company booked the cost of the franchise as an intangible asset, which...

...﻿1st Write-up: Krispy Kreme Doughnuts
The following are the major problems KKD were facing: It mistakenly tied up the profit, the number of stores, and the sales of machines and ingredients together. Moreover, it was too aggressive. It was hungry to show its ‘perfect performances’ to investors by beautifying their book value. From non-financial perspective, there are serious drawbacks behind the expanding, and the growing numbers of stores made the KK Doughnuts ‘everywhere’, which made customers lost their feelings of freshness of it.
As the case mentioned, KKD raised its purchase price on the Michigan franchise in order to get the interest of loans back and KKD recorded the interest under as an immediate income, profit. In the meanwhile, it booked the cost of buyback the franchise and the payment to the executive as an intangible asset, which the company did not amortize. In my opinion, the interest should be recorded under equity and the cost and payment could be booked as properties, cost, or at least they need to be amortized. KKD got the interest from the franchise and successfully raised its revenue to attract investors but it in fact sacrificed its shareholders’ benefits by offering an over value purchasing prize. Moreover, keeping the previous executive till the trade closed and giving a huge amount of compensation makes me wonder if there was an inside trade.
Exhibit 1, 2& 3 shows the unhealthy growth of KKD. Compared to the growth of total...

...Krispy Kreme Doughnuts, Inc. (hereinafter, “Krispy Kreme”) seemed poised to become an industry leader and Wall Street chart topper in 2000, however, by 2004 the company’s stock price had plummeted. Krispy Kreme’s stock price one day after the initial public offering in April of 2000, was $40.63, giving the company a market capitalization of nearly $500 million. Investors believed Krispy Kreme was the next big money maker to enter the market. By 2005, Krispy Kreme shares were trading at less than $10 a share, the company was in the midst of an SEC investigation into their accounting treatment for franchise acquisitions, and they found themselves on the verge of potentially defaulting on their credit facility.
Following the successful IPO, Krispy Kreme announced their aggressive plan to add approximately 350 more stores to their 144 store domestic arsenal and an additional 32 international locations. On May 7, 2004, Krispy Kreme announced adverse financial results for the first time since it became a publicly traded entity. Krispy Kreme told investors to expect earnings to be 10% lower than anticipated for the following three reasons: 1. the low-carbohydrate diet trend in the US had hurt sales 2. the company would take a $35 to $40 million charge because it was divesting a chain of 28 bakery cafes it had acquired for $40 million in stock the year before and...

...Krispy Kreme Doughnuts
Question 1: Analysts are predicting that Krispy Kreme will be able to perform highly effectively and continue to grow rapidly in the coming two years. Do you agree with their analysis? If so, why? If not, why not?
Key factors underlying growth:
1. Brand based on high quality product, highly differentiated products, high-volume production
2. Fragmented (regional) competition with less brand recognition
3. Strong opportunities to extend network of stores geographically.
4. Great steps to insure customer satisfaction from the use of their proprietary flour recipe to their automated doughnut making machines.
Question 2: What factors did the CIBC analysts examine to forecast sales growth for KKD in the years ended January 2003 and 2004? What assumptions did they implicitly make about number of new stores and weekly sales per store (for both company and franchise stores)? What are their implicit assumptions about revenue growth from franchise operations and KKM&amp;D? Do you agree with these forecasts?
Revenue Forecasts
The CIBC analysts’ forecasts were constructed using per store information.
* Company plans to add 62 new stores in 2003, mostly through area developers.
* Revenues per new store: Initial boom, followed by leveling off. Also, not all new stores are open for full year.
* Revenue growth per new store has been impressive. Franchise store revenue growth is still high, as the...

...Krispy Kreme DoughnutsQuestion 1:
Analysts are predicting that Krispy Kreme will be able to perform highly effectively andcontinue to grow rapidly in the coming two years. Do you agree with their analysis? If so, why? If not,why not?
Key factors underlying growth:
1.Brand based on high quality product, highly differentiated products, high-volume production2.Fragmented (regional) competition with less brand recognition3.Strong opportunities to extend network of stores geographically.4.Great steps to insure customer satisfaction from the use of their proprietary flour recipe totheir automated doughnut making machines.
Question 2:
What factors did the CIBC analysts examine to forecast sales growth for KKD in the yearsended January 2003 and 2004? What assumptions did they implicitly make about number of new storesand weekly sales per store (for both company and franchise stores)? What are their implicitassumptions about revenue growth from franchise operations and KKM&amp;D? Do you agree with theseforecasts?
Revenue Forecasts
The CIBC analysts’ forecasts were constructed using per store information.
•
Company plans to add 62 new stores in 2003, mostly through area developers.
•
Revenues per new store: Initial boom, followed by leveling off. Also, not all new stores areopen for full year.
•
Revenue growth per new store has been impressive. Franchise store revenue growth is stillhigh, as the number of area developers increase, with store...